Item 1. Business

General

USANA Health Sciences, Inc. (“We,” “USANA” or the “Company”) is a Utah corporation, founded in 1992 by Myron W. Wentz, Ph.D., that develops and manufactures high-quality, science-based nutritional and personal care products, with a commitment to continuous product innovation and sound scientific research. We distribute our products through a network marketing system using independent distributors that we refer to as “Associates.” As of January 1, 2005, we had approximately 114,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Mexico, the Netherlands, and the United Kingdom. We also sell products directly to “Preferred Customers” who purchase products for personal use and are not permitted to resell or distribute the products. As of January 1, 2005, we had approximately 63,000 active Preferred Customers worldwide. Sales to Preferred Customers accounted for approximately 15% of net sales during fiscal year 2004, which ended January 1, 2005. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.

We maintain executive offices and principal facilities at 3838 West Parkway Boulevard, Salt Lake City, Utah 84120. Our telephone number is (801) 954-7100. We maintain a World Wide Web site at www.usanahealthsciences.com. The information on our Web site should not be considered part of this report on Form 10-K.

Overview of Business Segments

We have two reportable business segments: Direct Selling and Contract Manufacturing.

Direct Selling

The Direct Selling segment comprises the Company’s principal line of business: developing, manufacturing, and distributing nutritional and personal care products. Our primary product lines within the Direct Selling segment consist of USANA^® Nutritionals, a line of quality supplements and food products, and Sensé—beautiful science^® (Sensé), our unique line of skin and personal care products. We also sell combination packs containing various products from these two primary product lines and sales tools that assist our Associates in building their business and selling products. The USANA^® Nutritionals product line accounted for approximately 82% of product sales in 2004, including sales from combination packs containing products from this line. Our top-selling products, USANA^® Essentials and Proflavanol^®, represented approximately 24% and 10%, respectively, of product sales in 2004. The USANA^® Essentials are also provided in a convenient pillow pack format, HealthPak 100™, which represented an additional 11% of product sales in 2004. The Sensé product line accounted for approximately 14% of product sales in 2004, including sales from combination packs containing products from this line. Sales from other items, the majority of which include marketing and sales tools, accounted for the remaining 4% of product sales in 2004. We market all of our products on the basis of high levels of bioavailability, safety, and quality.

We distribute our products through network marketing. Our network marketing distribution system involves the sale of products directly to independent distributors (Associates) and consumers (Preferred Customers). Our Associates purchase product not only for their own consumption, but are encouraged to build and manage their own sales force by recruiting, managing, and training others to sell our products. Associates are compensated for their own sales and a percentage of the sales (purchases) of their business group (downline). We believe that network marketing is an effective way to distribute our products because network marketing allows person-to-person product education, which is not readily available

through traditional distribution channels. Network marketing appeals to a broad cross-section of people, particularly those seeking to supplement their income, start a home-based business, or pursue entrepreneurial opportunities other than conventional full-time employment. We consider our rewarding compensation plan and weekly Associate incentive payments to be attractive components of the USANA network marketing system.

Net sales reported for each operating region within this segment are determined by the location from which the product shipment originates. North America is our primary market; however, our other markets continue to account for an increasing proportion of total net sales. Sales in North America accounted for 63.9% of consolidated net sales in 2004. Our key markets outside North America contributed to consolidated net sales in 2004 as follows:

·	Australia-New Zealand	13.1	%
·	Hong Kong	4.0	%
·	Japan	3.4	%
·	Taiwan	5.9	%
·	South Korea	2.1	%
·	Singapore	3.8	%

In February 2004, we completed the acquisition of the net assets of FMG Productions, LLC (FMG), a Utah limited liability company that produces video and audio promotional and training materials for large companies and sales organizations, including USANA, for $2.1 million in cash. FMG was acquired primarily as a new function to enhance the motivation and training of our independent Associates.

We commenced operations in our newest market, Mexico, in March of 2004. The Mexico market generated $8.3 million in sales for the first 10 months of 2004 operations.

Contract Manufacturing

Operating activities for the Contract Manufacturing segment include the manufacture of premium personal care products, produced under the brand name of its customers. We acquired manufacturing capabilities for personal care products in July 2003 with the purchase of Wasatch Products Development, Inc. (WPD), located in Draper, Utah. This acquisition was part of a vertical integration strategy that allowed us to bring the production of our Sensé product line in-house. In addition to the production of the Sensé product line, WPD also provides contract manufacturing services to a limited number of customers in the personal care market place. WPD contributed $10.3 million, or 3.8%, of consolidated net sales during the year ended January 1, 2005.

Industry Overview

The nutrition industry includes many small- and medium-sized companies that manufacture and distribute products generally intended to maintain the body’s health and general well being. Products within the industry are commonly classified into the following four major categories:

· Nutritional Supplements—products, such as vitamins and minerals, specialty supplements, herbs and botanicals, sports performance enhancers, meal replacements, dietary supplements, and compounds derived from these substances;

· Natural and Organic Foods—products, such as cereals, milk, non-dairy beverages, and frozen entrees;

· Functional Foods—products with added ingredients or fortification specifically for health or performance purposes; and

· Natural Personal Care—products combining nutrition with skin care.

In their October/November 2004 issue, the Nutrition Business Journal (“NBJ”) reported that global nutrition industry sales increased 8.4% to over $182 billion for the year 2003. According to NBJ, of that $182 billion, nutritional supplements contributed $61.9 billion, natural & organic foods $38.2 billion, functional foods $65.5 billion, and natural personal care $16.4 billion. In their May/June 2004 issue, NBJ reported that 2003 was the best year for nutritional supplement growth since 1999.

We believe that the following factors drive growth in the nutrition industry:

· The general public’s heightened awareness and understanding of the connection between diet and health;

· The aging population in most of our markets, particularly the baby-boomer generation, which tends to use more nutritional supplementation as it ages;

· Rising health care costs and the worldwide trend toward preventive health care; and

· Product introductions in response to new scientific findings.

Nutritional products are distributed through six major sales channels. Each channel has changed in recent years, primarily due to advances in technology and communications that have resulted in improved product distribution and faster dissemination of information. The major sales channels are as follows:

· Mass market retailers, including mass merchandisers, drug stores, supermarkets, and discount stores;

· Natural health food retailers;

· Network marketing;

· Mail order;

· Healthcare professionals and practitioners; and

· The Internet.

We distribute our products through the network marketing channel, which is a form of direct selling. According to the World Federation of Direct Selling Associations (“WFDSA”), in the past fifteen years the direct sales industry has grown from generating $40.2 billion annually in worldwide sales with 9.3 million independent distributors, to currently generating $89.2 billion with 49.9 million independent distributors.

NBJ reported in their May/June 2004 issue that 2003 was the best year since 1999 for network marketing in terms of U.S. nutrition industry sales growth. According to WFDSA international statistics, the United States remains the largest market for direct sales, with $29.5 billion in annual sales and 13.3 million independent distributors. According to the Direct Selling Association, wellness products, which include nutritional supplements and functional foods, account for 15.3%, and personal care products account for 29.4%, of U.S. direct sales, respectively.

We believe that we are well positioned to capitalize on growth trends in direct sales, as both a developer and manufacturer of nutritional supplements and personal care products, utilizing our network marketing distribution system.

Operating Strengths

Our principal objective is to be a leading developer, manufacturer, and distributor of science-based nutritional health and skin care products. Our strategy to achieve this objective is to capitalize on our operating strengths, which include our development and sale of science-based products, our strong

research and development capability, our in-house manufacturing capacity, our rewarding compensation plan for Associates, and our experienced management team.

Science-based Products. We have developed a line of high-quality health products based upon a combination of published research, in vitro and in vivo testing, in-house and third-party clinical studies, and sponsored research. We believe that the identification and delivery of essential vitamins, minerals, and other micro-nutrients, as well as macro-nutrients, will help individuals achieve and maintain long-term health.

Strong Research and Development. Dr. Wentz directs our research and development efforts, supported by a team of 20 scientists and researchers, including five scientists holding Ph.D. degrees. In our research and development laboratories, our scientists and researchers:

· Investigate in vitro and in vivo activity of new natural extracts and formulated products,

· Identify and research combinations of nutrients that may be candidates for new products,

· Study the metabolic activity of existing and newly identified nutritional supplements,

· Enhance existing products, as new discoveries in nutrition are made, and

· Formulate products to meet regulatory requirements of international markets.

In addition, we continue to perform double-blind, placebo-controlled, clinical studies intended to further evaluate the efficacy of our products.

In-house Manufacturing. We now manufacture products that account for approximately 78% of product sales in our Direct Selling segment. We believe that our ability to manufacture our own products is a significant competitive advantage for the following reasons:

· We can better control the quality of raw materials and the purity and potency of finished products,

· We can more reliably monitor the manufacturing process to reduce the risk of product contamination, and

· We believe we can better manage the underlying costs associated with manufacturing nutritional supplements.

Attractive Associate Compensation Plan and Benefits. We are committed to providing a highly competitive compensation plan to attract and retain Associates, who constitute our sales force. We believe the USANA Associate compensation plan (the “Compensation Plan”) is one of the most financially rewarding in the network marketing industry. Associate incentives totaled $104 million, or 39.8% of net sales, for the Direct Selling segment in 2004. We pay Associate incentives weekly. The Compensation Plan is a global-seamless plan, meaning that Associates can recruit and be compensated each week for their business success in any market in which we conduct business. To support our Associates, we sponsor events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to assist Associates in business development and to provide a forum for interaction with successful Associates and the USANA management team.

Experienced Management Team. Our management team includes individuals with expertise in various scientific and managerial disciplines, including nutrition, product research and development, marketing, customer network development, information technology, finance, operations, and manufacturing. The current executive management team has been in place for several years and is responsible for supporting growth and international expansion, strengthening our financial condition, and improving our internal controls.

Growth Strategy

We seek to grow our business by pursuing the following strategies:

Attract and Retain Associates and Preferred Customers. We recognize the need to continue to attract and retain Associates. In 2004, we maintained our emphasis on the partnership between the USANA management team and our Associate leaders (IDC—Independent Distributor Council). Through this partnership, the Associate leadership continued hosting “Health & Freedom Thursdays” aimed at presenting the business opportunity to potential Associates and providing additional training and resources for existing Associates. The number of Health and Freedom Thursday meetings increased to over 500 each week in 2004, resulting in an increase in the number of active Associates during 2004 and producing significant positive momentum with our Associate field.

In 2005, we intend to grow our business by focusing on our two core values, “True Health” and “True Wealth”. We plan to accomplish this by increasing the number of active Associates and teaching them how to build a strong customer base. By leveraging the current momentum we have in our Associate field, we believe we can continue to attract individuals that are interested in joining a winning team and starting a home-based business with USANA. We will emphasize “Sharing USANA” by increasing the number of sales tools and product samples distributed to prospects by our Associates in 2005. By bulk pricing these tools we believe that individuals will increase their activity of sharing the USANA message with others. We will utilize the many accomplishments, positive press, and break-through technology at USANA to demonstrate our competitive advantages within the industry. Actively promoting the success stories of our Associates in the field will likely increase our rank advancements, number of Associates receiving commissions, and awareness of preventive health. We intend to improve our training and recognition of Associate accomplishments, in order to strengthen the commitment and success of our sales force. Moreover, we believe that an increased interest from business and health care professionals, amateur and professional athletes, clubs, and associations will allow us to reach even more potential customers during 2005.

Enter New Markets. We believe that significant growth opportunities continue to exist in markets where we currently conduct business and in new international markets. We began operations in Mexico during March of 2004, and we intend to enter one additional market in 2005. New markets are selected following an assessment of several factors, including market size, anticipated demand for USANA products, receptivity to network marketing, and ease of entry, which includes consideration of possible regulatory restrictions on our products or our network marketing system. We have begun to register certain products with regulatory and government agencies in preparation for further international expansion. Wherever possible, we expect to seamlessly integrate the Compensation Plan in each market to allow Associates to receive commissions for global—not merely local—product sales. The seamless downline structure is designed to allow an Associate to build a global network by creating downlines across national borders. Associates are not required to establish new downlines or to re-qualify for higher levels of compensation in newly opened markets. We believe this seamless Compensation Plan can significantly enhance our ability to expand internationally, and we intend, where permitted, to integrate future markets into this seamless plan.

Introduce New and Re-formulate Existing Products. Using our research and development capabilities, we introduce innovative products and continuously enhance existing products. In 2004, we re-formulated all thirteen of our skin care and personal care products based on an innovative self-preserving technology that eliminates the need for traditional chemical preservatives. With this re-formulation, we introduced a new product, Intensive Hand Therapy, to the personal care line.

Pursue Strategic Acquisitions. We believe that attractive acquisition opportunities may arise in the future. We intend to pursue strategic acquisition opportunities that would grow our customer base, expand our product lines, enhance our manufacturing and technical expertise, allow vertical integration, or

otherwise complement our business or further our strategic goals. For example, we completed the acquisition of FMG in early 2004 as part of a strategy to enhance the motivation and training of our independent Associates.

Products

Our primary product lines within the Direct Selling segment consist of USANA^® Nutritionals and Sensé—beautiful science^® (Sensé). The USANA^® Nutritionals product line is further categorized into three separate classifications: Essentials, Optimizers, and Macro Optimizers.

USANA^® Nutritionals

The Essentials include core vitamin and mineral supplements that provide a foundation of advanced nutrition for every age group. To help meet the “essential” nutrient needs of children and teens during the years of development, when good nutrition is most important, USANA offers: Usanimals™, a formulation of vitamins, minerals, and antioxidants, in an easy-to-take chewable tablet for children 13 months to 12 years old, and Body Rox™, a nutritional supplement containing 31 essential vitamins, minerals, antioxidants, and cofactors for adolescents 12 to 18 years old. USANA^® Essentials for adults is a combination of two products: Mega Antioxidant, a balanced, high-potency blend of 30 vitamins, antioxidants, and other important nutrients to support cellular metabolism and to counteract free-radical damage and Chelated Mineral, a complete spectrum of essential minerals, in balanced, highly bioavailable forms. The USANA^® Essentials are also provided in a convenient pillow pack format, HealthPak 100™.

Optimizers are more targeted supplements designed to meet individual health and nutritional needs. Products in this category include Proflavanol^®,Poly C^®, Procosa^® II, CoQuinone^® 30, BiOmega-3™, E-Prime™, Active Calcium™, Body Rox Active Calcium Chewable™, PhytoEstrin™, Palmetto Plus™, Ginkgo-PS™, Garlic EC™, Visionex^®, and OptOmega^®.

The Macro Optimizers include healthy convenience foods and other related products. Nutrimeal™, Fibergy^®, and SoyaMax™ powdered drink mixes, and nutrition and fiber bars are included in this product category.

Sensé—beautiful science^®

The Sensé product line includes premium, science-based personal care products that support healthy skin and hair by providing advanced topical nourishment, moisturization and protection. At our Annual International Convention held in September 2004, we announced the re-formulation of the Sensé product line, now produced with our patent-pending, self-preserving technology. This new technology uses a unique blend of botanicals, antioxidants, and active ingredients to keep products fresh, without adding traditional chemical preservatives. Products in this line include Perfecting Essence, Gentle Daily Cleanser, Hydrating Toner, Daytime Protective Emulsion SPF 15, Eye Nourisher, Night Renewal, Serum Intensive, Rice Bran Polisher, Nutritious Crème Masque, Revitalizing Shampoo, Nourishing Conditioner, Firming Body Nourisher, Energizing Shower Gel, and the newly introduced Intensive Hand Therapy.

All Other

In addition to these principal product lines, we have developed and sell to Associates materials and online tools designed to assist them in building their business and selling products. These resource materials or sales tools include product brochures and business forms designed by us and printed by outside publishers. We periodically contract with authors and publishers to produce or provide books, tapes, and other items dealing with health topics and personal motivation, which are sold to Associates. We also write and develop our own materials for audio and videotapes, which are produced by the newly acquired FMG. New Associates are required to purchase a starter kit containing USANA training

materials that assist Associates in starting and growing their business. Associates do not earn commissions on the sale of starter kits or sales tools.

The Contract Manufacturing segment includes the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for our Sensé product line.

The following table summarizes the approximate percentage of total product sales for the Direct Selling segment contributed by major product line for the last three fiscal years:

	Sales By Product Line* Year Ended
Product Line	2002			2003			2004
USANA^® Nutritionals
Essentials**		36	%		39	%		38	%
Optimizers		36	%		34	%		34	%
Macro Optimizers		9	%		8	%		10	%
Sensé—beautiful science^®		14	%		14	%		14	%
All Other		5	%		5	%		4	%

* Product sales previously categorized as Combination Packs have been allocated to their respective product lines based on the weighted average price of the product components that comprise each pack.

** The Essentials category under the USANA^® Nutritionals product line includes USANA^® Essentials, HealthPak 100™, Body Rox™, and Usanimals™.

Key Products

The following highlights sales data for our top-selling products as a percentage of Direct Selling segment product sales for the fiscal year ended January 1, 2005.

USANA^® Essentials	24	%
HealthPak 100™	11	%
Proflavanol	10	%

Research and Development

We are committed to continuous product innovation and improvement through sound scientific research. The mission of the research and development team is to develop, for all age groups, advanced health products that reduce the risk of chronic degenerative disease and promote long-term health. These research efforts are enhanced using a combination of published research, in vitro and in vivo testing, in-house and third-party clinical studies, and sponsored research. We periodically consult with a panel of physicians who provide advice on product development. In fiscal years 2002, 2003, and 2004, we expended $1.0 million, $1.4 million, and $2.0 million, respectively, on company-sponsored research and development activities. We intend to continue to dedicate resources at similar levels for the research and development of new products and the reformulation of existing products.

We maintain a research and development program based upon established scientific research methodologies. The modern research facilities located at our Salt Lake City headquarters are equipped to conduct analytical testing of raw ingredients, raw material extraction research, in vitro and in vivo testing, and human bioavailability studies. In-house and third-party clinical studies are conducted on select products to further identify benefits. With the acquisition of our own skin care manufacturing facility in

2003, our research and development expertise expanded to include formulation development and quality control analysis of skin and personal care products.

Manufacturing and Quality Assurance

Tablet manufacturing is conducted at our Salt Lake City, Utah, manufacturing facility. The production process for tablet-based products includes identifying and evaluating suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring the raw materials, mixing raw materials into batches, forming the mixtures into tablets, coating and sorting the tablets, analyzing tablet quality, packaging finished products, and analyzing finished product quality.

Our tablet manufacturing process uses automatic and semi-automatic equipment. We conduct sample testing of raw materials and finished products for purity, potency, and composition conforming to strict specifications. Constructed in 1996, the tablet production facility is registered with the U.S. Food and Drug Administration (“FDA”) and Health Canada and has been inspected and certified by the Australian Therapeutic Goods Administration (“TGA”). In the United States, the manufacture of nutritional supplements and related products requires compliance with food-level Good Manufacturing Practice regulations (“GMP’s”) of the FDA. We believe that our processes comply with the FDA’s more demanding drug-level GMP’s. The certification by the TGA also denotes compliance with that agency’s drug-level GMP’s.

In addition to tablet manufacturing, we also manufacture premium personal care products at our Draper, Utah, manufacturing facility. We acquired manufacturing capabilities for personal care products in July 2003 with the purchase of Wasatch Products Development, Inc., as part of a vertical integration strategy that has allowed us to bring the production of our Sensé product line in-house. Personal care products are also manufactured at this facility for third parties on a contract basis. During 2004, we completed construction upgrades to our Draper, Utah manufacturing facility designed to conform it to the FDA’s good manufacturing practices. The production process for personal care products includes identifying and evaluating suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring the raw materials, mixing raw materials into batches, analyzing liquid batch quality, packaging finished products, and analyzing finished product quality.

WPD’s manufacturing operation is registered with the FDA as a pharmaceutical facility, consistent with a facility that manufactures over-the-counter personal care products. The WPD facility has standard kettles and technology for producing batches of personal care items and semi-automatic packaging equipment for packaging the end product. The facility employs qualified staff to develop, implement, and maintain a quality system that we believe is consistent with requirements under drug-level GMP’s.

We contract with third-party manufacturers and vendors for the production of some of our products. These third-party vendors and manufacturers produce and, in most cases, package these products according to formulations developed by or in conjunction with our in-house product development team. Products currently supplied through third parties include gelatin-capsuled supplements, powdered drink mixes, and nutrition and fiber bars.

We conduct quality control processes in two in-house laboratories located in Salt Lake City, Utah. In the microbiology laboratory, scientists test for biological contamination of raw materials and finished goods. In the analytical chemistry laboratory, scientists test for chemical contamination and accurate active ingredient levels of raw materials and finished products. Both laboratories conduct stability tests on finished products to determine product shelf life. Our laboratory staff also performs chemical assays on vitamin and mineral constituents under United States Pharmacopoeia methods and other internally validated methods. In addition to the quality control and clinical laboratories, our headquarters facility also houses a laboratory designated for research and development.

Most of the raw ingredients used in the manufacture of our products, for both the Direct Selling and Contract Manufacturing segments, are available from a number of suppliers. We have not generally experienced difficulty in obtaining necessary quantities of raw ingredients. When supplies of certain raw materials have tightened, we have been able to find alternative sources of raw materials, as needed, and believe we will be able to do so in the future, if the need arises.

During 2004, we continued to encounter higher purchase prices for one of our raw materials, Coenzyme Q10 (CoQ10), due to a persistent shortage in supply. We have qualified multiple sources to supply this raw ingredient and are confident that we can obtain the quantities necessary to meet production requirements. However, we expect sustained modest pressure on the gross profit margin for our Direct Selling segment from higher purchase prices for CoQ10 until suppliers re-tool their manufacturing facilities to increase production capacity in order to meet rising demand.

We have made several upgrades during the last year to our Salt Lake City manufacturing facility to ensure long-term capacity and flexibility in our daily operations. We now have four kitting rooms, four large blenders, seven production tablet presses, three coaters, three sorting lines, two bottling lines, and two pillow-pack lines. We currently operate two eight-hour shifts, five days per week. There is, however, no restriction from processes or equipment to add a third shift for additional capacity. Based on equipment capacity and current product mix, the average manufacturing and packaging rate is at approximately 50% of capacity, assuming two eight-hour shifts, five days per week.

WPD currently produces an average of 5.7 million filled containers per annum. Assuming two eight-hour shifts per day, five days per week, WPD uses approximately 65% of manufacturing and packaging capacity.

Distribution and Marketing

We distribute products through a network marketing system and sell directly to our customers. Network marketing is a form of person-to-person direct selling through a network of vertically organized independent distributors who purchase products at wholesale prices from the manufacturer and then make retail sales to consumers. The emergence of readily available means of mass communication, such as personal computers, facsimiles, low-cost long distance telephone services, satellite conferencing and the Internet, have contributed to the rapid growth of network marketing. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education, which is not as readily available through other distribution channels.

A person who wishes to sell USANA products must join our independent sales force as an Associate. A person becomes an Associate by completing an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate’s downline sales organization. New Associates sign a written contract and agree to adhere to the USANA policies and procedures. New Associates are also required to purchase a starter kit that includes a detailed manual, including our policies and procedures. Starter kits are sold at our cost for a purchase price of approximately $49. We also offer starter kits in an electronic format at a lower price, which are also sold at our cost.

Subject to payment of an annual renewal fee, Associates may continue to distribute products until they voluntarily withdraw or are terminated. Initial training of Associates about the products, the Compensation Plan, network marketing, and USANA is provided primarily by an Associate’s sponsor and others in their sales organization. In addition, we develop and sell training materials and sales tools to assist Associates in building their business. We also periodically sponsor and conduct regional, national, and international Associate events and intensive leadership training seminars. Attendance at these sessions

is voluntary, and we undertake no generalized effort to provide individualized training to Associates, although experience shows that the most effective and successful Associates participate in training activities. Associates may not sell competitive products to other USANA Associates or solicit USANA Associates to participate in other network marketing opportunities. Our policies and procedures also restrict Associates’ advertising and representations or claims concerning USANA products or the Compensation Plan.

The Compensation Plan provides several opportunities for Associates to earn compensation, provided they are willing to consistently work at building, training, and retaining their downline organizations to sell USANA products to consumers. We believe this Compensation Plan is distinctive for its weekly distributions and equitable payouts, which are designed to create appropriate incentives for the sale of USANA products. Each Associate must purchase and sell products in order to earn commissions and bonuses. Associates cannot simply recruit others for the purpose of developing a downline and earn income passively, depending solely on the efforts of the downline.

Associates can earn compensation primarily in three ways:

· Generating sales volume points based on their sales activity and the sales activity of their downline sales organization,

· Participating in a leadership bonus pool based on certain performance requirements, and

· Purchasing products at wholesale prices from USANA and selling them to consumers at higher retail prices.

We also offer our Associates the opportunity to earn additional compensation through Company-sponsored promotions and contests. Most of our products are assigned sales volume points. Commission payments to Associates are based on total personal and downline sales volume points, with commissions paid weekly. As an Associate successfully expands his or her downline sales organization and as those in the downline also successfully expand, the Associate can receive higher commissions.

We endeavor to seamlessly integrate this Compensation Plan across all markets in which USANA products are sold, allowing Associates to receive commissions for global—not merely local—product sales. This seamless downline structure is designed to allow an Associate to build a global network by creating downlines across national borders. Associates may expand their downline organizations into new markets without establishing new downlines or requalifying for higher levels of compensation in the newly opened markets. We believe this seamless Compensation Plan significantly enhances our ability to expand internationally, and we intend, where permitted, to continue to integrate new markets into this plan.

Most Associates sell our products on a part-time basis and consume them personally. The sponsoring of new Associates results in the creation of multiple levels within our network marketing structure. Sponsored Associates are referred to as the “downline” of the sponsoring Associate. Downline Associates may also sponsor new Associates, creating additional levels in their network, but also forming a part of the same downline as the original sponsoring Associate. Associates interested in earning additional income who successfully expand their business network or downline can qualify for higher levels of compensation, as well as leadership bonuses, by attaining certain sales volume levels and demonstrating leadership abilities. We do not pay commissions based on recruiting or sponsorship activity.

We also sell directly to customers who purchase products only for personal consumption. This program is our “Preferred Customer” program. Preferred Customers may not resell or distribute the products. We believe this program gives us access to a market that would otherwise be missed, by targeting customers who enjoy USANA products, but prefer not to maintain a sales, distribution, or other business relationship with USANA. Although our policies prohibit Preferred Customers from engaging in retail

sales of products purchased through the program, they may enroll as Associates at any time if they desire. Only Associates are eligible to participate in the Compensation Plan.

Product Returns

Our product return policy allows retail customers to return the unused portion of any product to the Associate who sold them the product for a full cash refund. We typically reimburse our Associates based on the original form of payment or with product or credit on account upon receipt of proper documentation and the return of the remaining product.

All returned product within the first 30 days following purchase is refunded at 100% of the sales price to all non-Associate customers. This 30-day return policy is offered to Associates only on their first order. All other returned product that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price less a 10% restocking fee. Return of product that was not damaged at the time of receipt by the Associate may result in cancellation of the Associate’s distributorship according to the terms of the Associate agreement. During fiscal years 2002, 2003, and 2004, returns as a percentage of net sales were 1.7%, 2.4%, and 2.1%, respectively.

Major Customers

Sales in our Direct Selling segment are made to independent Associates and Preferred Customers. No single customer accounted for 5% or more of net sales in any of the last three fiscal years. Associates are independent contractors and are not agents, employees, or legal representatives of USANA. Our employees and affiliates cannot be Associates, although there is no prohibition on their family members becoming Associates as long as they do not reside in the same household as the employee or affiliate. Associates may sell products only in markets where we have approved the sale of our products.

Sales made by the Contract Manufacturing segment to one third-party customer accounted for 77% of segment revenues for the fiscal year 2004. No other individual customer accounted for 10% or more of segment net revenues during the same time period.

Compliance by Associates

From time to time Associates fail to adhere to the USANA policies and procedures, including those governing the marketing of our products or making representations regarding the Compensation Plan. We systematically review reports of alleged Associate misbehavior. Infractions of the policies and procedures are reported to a compliance committee that determines what disciplinary action may be warranted in each case. If we determine that an Associate has violated any of the USANA policies and procedures, we may take a number of disciplinary actions. For example, we may impose sanctions, such as warnings, fines or probation. We also may withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied, or take other appropriate actions at our discretion. As a result of more serious infractions, we may terminate the Associate’s purchase and distribution rights completely.

Information Technology

We believe that the ability to efficiently manage distribution, compensation, manufacturing, inventory control, and communications functions through the use of sophisticated and dependable information processing systems is critical to our success. To optimally support our customer base and core business processes, our information technology resources consist of a customized, Web-enabled order-entry system and an Enterprise Resource Planning system that operate on an Oracle platform and are fully integrated worldwide. Our information systems are maintained by in-house staff and outside consultants.

Regulatory Matters

Product Regulation. Numerous governmental agencies in the United States and other countries regulate the manufacturing, packaging, labeling, advertising, promoting, distributing, and the selling of nutrition, health, beauty, and weight management products. In the United States, advertisement of our products is regulated by the Federal Trade Commission (“FTC”) under the FTC Act and, where such advertising is considered to be product labeling by the FDA, under the Food, Drug, and Cosmetic Act (“FD&C”) and regulations promulgated under that act. USANA products are also subject to regulation by, among others, the Consumer Product Safety Commission, the US Department of Agriculture, and the Environmental Protection Agency. The manufacturing, labeling, and advertising of products are also regulated by various governmental agencies in each foreign country in which they are distributed. For example, in Australia we are subject to the Therapeutic Goods Administration and in Japan to the Ministry of Health, Labor and Welfare.

Our largest product group in terms of sales includes products that are regulated as dietary supplements under the FD&C. Dietary supplements are also regulated in the United States under the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). We believe DSHEA provides a favorable regulatory climate to the dietary supplement industry. Some of our powdered drink, food bar, and other nutrition products are regulated as foods under the Nutrition Labeling and Education Act of 1990 (“NLEA”). The NLEA establishes requirements for ingredient and nutritional labeling and labeling claims for foods. Although we believe our product claims comply with the law, we may need to revise some product labeling at a future date, if labeling requirements change.

Under these regulations, a dietary supplement that contains a new dietary ingredient (defined as an ingredient not on the market before October 15, 1994) must have a history of use or other evidence of safety establishing that it is reasonably expected to be safe. The manufacturer must notify the FDA at least 75 days before marketing products containing new dietary ingredients and provide the FDA with the information upon which the manufacturer based its conclusion that the product has a reasonable expectation of safety.

The FDA issued final dietary supplement labeling regulations in 1997 that required a new format for product labels and necessitated revising dietary supplement product labels by March 23, 1999. All companies in the dietary supplement industry were required to comply with these new regulations. We updated our product labels in 1997 in response to these new regulations.

On March 13, 2003, the FDA announced a proposal for new GMP’s specific to dietary supplements. As of January 1, 2005, there has been no update to the FDA’s proposal for new dietary supplement GMP’s. These GMP’s, if promulgated, may be significantly more rigorous than currently applicable GMP’s. We believe that we currently manufacture our dietary supplement products according to the standards of the FDA’s pharmaceutical-level GMP’s. However, we may be required to expend additional capital and resources on manufacturing controls in the future in order to comply with the law, if new GMP’s are adopted.

Other products we market include cosmetics and products deemed to be over-the-counter (“OTC”) drugs. In general, our cosmetic products are not subject to pre-market approval by the FDA. However, cosmetics are subject to regulation by the FDA under the FD&C adulteration and misbranding provisions. Cosmetics also are subject to specific labeling regulations, including warning statements, if the safety of a cosmetic is not adequately substantiated or if the product may be hazardous, as well as ingredient statements and other packaging requirements under the Fair Packaging and Labeling Act. Cosmetics that meet the definition of a drug (i.e., that are intended to treat or prevent disease or affect the structure or function of the body), such as our sunscreens, are regulated as drugs. OTC drug products may be marketed if they conform to the requirements of the OTC monograph that is applicable to that drug. Drug products not conforming to monograph requirements require an approved New Drug Application (“NDA”) before

marketing. Under these provisions, if the agency were to find that a product or ingredient of one of our OTC drug products is not generally recognized as safe and effective or is not included in a final monograph applicable to one of our OTC drug products, we will have to reformulate or cease marketing that product until it is the subject of an approved NDA or until the time, if ever, that the monograph is amended to include the product. If such an agency ruling were to become final, we would be required to stop marketing the product as currently formulated. Whether or not an OTC drug product conforms to a monograph or is subject to an approved NDA, the drug must comply with other requirements under the FDCA, including GMP’s, labeling, and the FDCA’s misbranding and adulteration provisions.

Advertising of products is subject to regulation by the FTC under the FTC Act. Section 5 of the FTC Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. Section 12 of the FTC Act provides that disseminating any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this FTC requirement, we are required to have adequate substantiation for all material advertising claims made for our products.

In recent years the FTC has initiated numerous investigations of and actions against dietary supplement, weight management, and cosmetic products and companies. The FTC has issued a guidance document to assist companies in understanding and complying with the substantiation requirement. We believe that we have organized the documentation to support our advertising and promotional practices in compliance with these guidelines.

The FTC may enforce compliance with the law in a variety of ways, both administratively and judicially, using compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as the agency deems necessary to protect the public. Violation of these orders could result in substantial financial or other penalties. We have not been notified that we were the subject of any action by the FTC, but any action in the future by the FTC could materially adversely affect our ability to successfully market our products.

The events of September 11, 2001 highlighted the need to enhance the security of the U.S. food supply. Congress responded by passing the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (“Bioterrorism Act”). We expect that several provisions of the Bioterrorism Act will place additional regulatory compliance issues upon us. For example, one provision in the Bioterrorism Act requires the Secretary of Health and Human Services to develop regulations that mandate domestic and foreign facilities that manufacture, process, pack, or hold food for human or animal consumption in the United States to register with the FDA. On November 24, 2003, we fulfilled this requirement by registering with the FDA. Another provision of the Bioterrorism Act mandates that the FDA receive prior notification of all food importation. Our OptOmega product is packaged outside of the United States and imported into the United States and therefore we are required to comply with this notification requirement.

In markets outside the United States, prior to commencing operations or marketing products, we may be required to obtain approvals, licenses, or certifications from a country’s ministry of health or comparable agency. Approvals or licensing may be conditioned on reformulation of USANA products for the market or may be unavailable with respect to certain products or product ingredients. We must also comply with local product labeling and packaging regulations that vary from country to country. Foreign regulatory requirements have not placed a significant burden on our ability to operate in current foreign countries.

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. Future changes could include requirements for the reformulation of certain products to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, and results of operations.

Network Marketing Regulation. Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. These laws include anti-pyramiding, securities, lottery, referral selling, anti-fraud and business opportunity statutes, regulations, and court cases. Illegal schemes, typically referred to as “pyramid,” “chain distribution,” or “endless chain” schemes, compensate participants primarily or solely for the introduction or enrollment of additional participants into the scheme. Often these schemes are characterized by large up-front entry or sign-up fees, over-priced products of low value, little or no emphasis on the sale or use of products, high-pressure recruiting tactics, and claims of huge and quick financial rewards requiring little or no effort. Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within sales organizations is based on sales of the enterprise’s products, rather than investments in the organizations or other non-retail sales related criteria or activity. Where required by law, we obtain regulatory approval of our network marketing system, or, where approval is not required or available, the favorable opinion of local counsel as to regulatory compliance.

In addition to federal regulation in the United States, each state has enacted its own “Little FTC Act” to regulate sales and advertising. Occasionally we receive requests to supply information regarding our network marketing plan to regulatory agencies. Although we have from time to time modified our network marketing system to comply with interpretations of various regulatory authorities, we believe that our network marketing program is in compliance with laws and regulations relating to network marketing activities in our current markets. Nevertheless, we remain subject to the risk that, in one or more of our present or future markets, the marketing system or the conduct of certain Associates could be found not to be in compliance with applicable laws and regulations. Failure by an Associate or us to comply with these laws and regulations could have a material adverse effect on our business in a particular market or in general. Any or all of these factors could adversely affect the way we do business and could affect our ability to attract potential Associates or enter new markets. In the United States, the FTC has been active in its enforcement efforts against both pyramid schemes and legitimate network marketing organizations with certain legally problematic components, having instituted several enforcement actions resulting in signed settlement agreements and payment of large fines. Although to our knowledge, we have not been the target of an FTC investigation, there can be no assurance that the FTC will not investigate us in the future.

We cannot predict the nature of any future law, regulation, interpretation, or application, nor can we predict what effect additional governmental legislation or regulations, judicial decisions, or administrative orders, when and if promulgated, would have on our business in the future. It is possible that future developments may require that we revise our network marketing program. Any or all of these requirements could have a material adverse effect on our business, results of operations, and financial condition.

Transfer Pricing Regulation. We have adopted transfer prices, which are supported by a formal transfer pricing study for the sale of products to our subsidiaries in accordance with applicable transfer pricing laws. In addition, agreements between the subsidiaries and the parent corporation have been entered into for services and contractual obligations, such as the payment of Associate incentives. If the

United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these agreements or require changes in our transfer pricing practices for products, we could become subject to higher taxes and our earnings would be adversely affected. We believe that we operate in compliance with all applicable transfer pricing laws. However, there can be no assurance that we will continue to be found to be operating in compliance with transfer pricing laws or that those laws will not be modified, which may require changes in our operating procedures.

Competition

The business of developing and distributing nutritional and personal care products, such as those we sell and distribute, is highly competitive due to the nature of the industry. The nutritional supplement market is characterized by:

· Large selections of essentially similar products that are difficult to differentiate,

· Retail consumer emphasis on value pricing,

· Changing formulations based on evolving scientific research,

· Low barriers to entry resulting from low brand loyalty, rapid change, widely available manufacturing, low regulatory requirements, and ready access to large distribution channels, and

· A lack of uniform standards regarding product ingredient sources, potency, purity, absorption rate, and form.

Similar factors are also characteristic of products comprising our other product lines.

Numerous manufacturers, distributors, and retailers compete for consumers and, in the case of other network marketing companies, for distributors. We compete directly with other entities that develop, manufacture, market, and distribute products in each of our product lines. We compete with these entities by emphasizing the underlying science, value, and superior quality of our products, as well as the convenience and financial benefits afforded by our network marketing system and Compensation Plan. However, many of our competitors are substantially larger, have greater financial resources, and have broader name recognition than we have. There can be no assurance that we will be able to effectively compete in this intensely competitive environment.

Our markets are highly sensitive to the introduction of new products that may rapidly capture a significant share of those markets. Our product offerings in each product category are relatively few, compared to the wide variety of products offered by many of our competitors, and are often premium priced. As a result, our ability to remain competitive depends in part upon the successful introduction of new products and enhancements of existing products.

We also compete with other network marketing organizations for the time, attention, and commitment of new and current Associates. Our ability to remain competitive in this regard depends, in significant part, on our success in recruiting and retaining Associates. We believe that we offer a rewarding Associate Compensation Plan and attractive Associate benefits and services. To the extent practicable, our Associate Compensation Plan is designed to be seamless, permitting international expansion without re-qualification or re-entry requirements. We also pay Associate incentives weekly, reducing the time an Associate must wait between purchase and sale of products and payment of commissions. However, there can be no assurance that our programs for recruiting and retaining Associates will be successful. The pool of individuals interested in the business opportunities presented by network marketing tends to be limited in each market and is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe that we offer an attractive opportunity for our Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential Associates in a given market.

We believe that the leading network marketing company in the world, based on total sales, is Amway Corporation and its affiliates, and that Avon Products, Inc. is the leading direct seller of beauty and related products worldwide. Leading competitors in the nutritional network marketing and nutritional product industry include Herbalife, Inc., Market America, Inc., Nature’s Sunshine Products, Inc., Nu Skin Enterprises, Inc., NBTY, Inc., and Weider Nutrition. We believe there are other manufacturers of competing product lines that may launch direct selling enterprises, which will compete with us in certain product lines and for Associates. There can be no assurance that we will be able to successfully meet the challenges posed by this increased competition.

Intellectual Property

Trademarks. We have developed and we use registered trademarks in our business, particularly relating to our corporate and product names. We own 13 trademarks registered with the United States Patent and Trademark Office. We also have one pending application to register a trademark in the United States. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have filed applications and own trademark registrations, and we intend to register additional trademarks in foreign countries where USANA products are or may be sold in the future. Protection afforded to registered trademarks in some jurisdictions may not be as extensive as the protection available in the United States.

We also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of protection afforded by registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of USANA, and the marketing of USANA products. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete.

Trade Secrets. We own certain intellectual property, including trade secrets, that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.

Patents. We have two patents, issued in 2002, which will continue in force for 17 years from the date of issue. These patents are process patents and relate to the method of extracting an antioxidant from olives and the waste products of olive oil production. In 2003, we entered into a licensing agreement with a vendor to make olive extract using our patented process. Currently, it is very difficult to determine the exact future benefit of these patents. However, we believe that the patents have the potential to generate additional revenue in the future through new product development and royalties from licensing.

Products within the Contract Manufacturing segment are developed on behalf of customers and are labeled under customer brand names. We currently do not possess intellectual property claims for products in this segment.

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

Seasonality

We believe that the impact of seasonality on results of operations is not material for either the Direct Selling or Contract Manufacturing segments.

Backlog

Products sold within the Direct Selling segment are typically shipped within 72 hours after the receipt of the order. As of March 2, 2005, there was no significant backlog in either the Direct Selling or Contract Manufacturing segment.

Working Capital Practices

We maintain sufficient amounts of inventory in stock for our Direct Selling segment in order to provide a high level of service to Associates and Preferred Customers. Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor. Our Contract Manufacturing segment maintains adequate amounts of commodity inventory (that which can be used for various customers) and minimal quantities of specialty inventory (that which is ordered specifically for the needs of individual customers) to meet customer demand.

Environment

We are not aware of any instance in which we have contravened federal, state, or local provisions enacted for or relating to protection of the environment or in which we otherwise may be subject under environmental laws to liability for environmental conditions that could materially affect operations.

Employees

As of March 2, 2005, we had 672 employees worldwide, as measured by full time equivalency. Our employees are not currently represented by a collective bargaining agreement, and we have not experienced work stoppages as a result of labor disputes. We believe our relationship with our employees is good.

Additional Available Information

We make available, free of charge at our corporate web site, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This information may also be obtained from the SEC’s on-line database located at www.sec.gov.

Item 2. Properties

Our corporate headquarters are located in Salt Lake City, Utah in a building of 192,000 square feet on a company-owned 16-acre parcel. The allocation of this space is as follows: approximately 56,000 square feet for manufacturing, packaging, and distribution; approximately 65,000 square feet of warehouse space; and approximately 71,000 square feet occupied by executive and administrative personnel, customer services, research and development, and three laboratories. During 2004, we completed construction that expanded our manufacturing capacity and converted a portion of our existing warehouse space into additional office space occupied by administrative personnel. We own our corporate headquarters facility, as well as the production studio and office space purchased in connection with our acquisition of FMG.

We lease properties used primarily as regional offices and distribution warehouses located in Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, and Mexico. Our leased

contract manufacturing and warehousing facilities are housed in a building of approximately 27,000 square feet located in Draper, Utah.

We believe that these facilities are suitable for their respective uses and are, in general, adequate for our present and near-term future needs. Current monthly lease commitments for the properties under lease total approximately $256,000. All properties are part of the Direct Selling segment with the exception of the Draper, Utah facility that is used by the Contract Manufacturing segment.

Item 3. Legal Proceedings

From time to time, we become a party to lawsuits and claims that arise in the ordinary course of business relating to employment, intellectual property, and other matters. We believe that such current claims, individually or in the aggregate, will not result in a material adverse effect on our business, financial position, or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during the quarter ended January 1, 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock trades on The NASDAQ National Market System under the symbol “USNA.” The following table contains the reported high and low sale prices for our common stock as reported on The NASDAQ National Market System for the periods indicated:

2003	High		Low
First Quarter	$	9.98	$	5.58
Second Quarter	$	25.70	$	9.58
Third Quarter	$	28.22	$	16.79
Fourth Quarter	$	39.49	$	22.93

2004	High		Low
First Quarter	$	36.59	$	22.89
Second Quarter	$	32.47	$	23.07
Third Quarter	$	35.75	$	25.81
Fourth Quarter	$	36.50	$	27.77

On March 2, 2005, the high and low sales prices of our common stock as reported by NASDAQ were $43.50 and $40.30, respectively.

Shareholders

As of March 2, 2005, we had approximately 560 holders of record of the common stock and an estimated 18,900 beneficial owners, including shares of common stock held in street name.

Dividends

We have never declared or paid cash dividends on our common stock. Future cash dividends, if any, will be determined by the Board of Directors and will be based on earnings, available capital, our financial condition, and other factors deemed relevant by the Board of Directors.

Share Repurchases

Purchases made during the quarter ended January 1, 2005 and for each fiscal month therein are summarized in the following table:

Issuer Purchases of Equity Securities
(amounts in thousands, except per share data)

Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs*
October 3, 2004 through November 6, 2004 (Fiscal October)		240		$	30.84		240		$	9,999
November 7, 2004 through December 4, 2004 (Fiscal November)		201		$	28.78		201		$	4,214
December 5, 2004 through January 1, 2005 (Fiscal December)		3		$	29.99		3		$	4,124
Total		444		$	29.90		444

* At their October 2004 meeting, the Board of Directors approved an increase in the dollar amount that may be purchased under the Company’s share repurchase plan from the dollar value outstanding in the plan at that time, up to $17.4 million.

Item 6. Selected Financial Data

The selected consolidated financial data set forth below with respect to the consolidated statements of earnings and consolidated balance sheets for each of the last five fiscal years are derived from our audited consolidated financial statements for the relevant periods. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and related notes thereto that are included in this report.

	Fiscal Year*
	2000			2001			2002			2003		2004
	(in thousands, except per share data)
Consolidated Statements of Earnings Data:
Net sales	$	123,180		$	114,280		$	133,776		$	200,013	$	272,824
Cost of sales	36,344			32,802			33,392			44,422		66,822
Gross profit	86,836			81,478			100,384			155,591		206,002
Operating expenses:
Associate incentives	47,032			43,912			51,174			78,675		104,433
Selling, general, and administrative	32,939			32,286			35,382			44,413		54,692
Research and development	1,410			1,080			1,035			1,384		2,031
Total operating expenses	81,381			77,278			87,591			124,472		161,156
Earnings from operations	5,455			4,200			12,793			31,119		44,846
Other income (expense), net	(677		)	(692		)	(221		)	192		233
Earnings before income taxes	4,778			3,508			12,572			31,311		45,079
Income taxes	1,911			1,309			4,069			10,494		14,302
Net earnings	$	2,867		$	2,199		$	8,503		$	20,817	$	30,777
Earnings per share:
Basic	$	0.15		$	0.11		$	0.45		$	1.09	$	1.61
Diluted	$	0.14		$	0.11		$	0.41		$	0.98	$	1.51
Weighted average shares outstanding:
Basic	19,574			19,356			18,884			19,018		19,163
Diluted	19,780			19,412			20,647			21,319		20,415
Dividends per share	—			—			—			—		—

	As of
	Dec. 30,		Dec. 29,		Dec. 28,		Jan. 3,		Jan. 1,
	2000		2001		2002		2004		2005
	(in thousands, except other data)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	2,900	$	2,465	$	6,686	$	18,965	$	15,067
Working capital	2,308		350		1,228		18,330		18,073
Current assets	16,927		14,189		18,907		38,249		40,823
Total assets	35,492		35,354		39,113		65,127		71,664
Long-term debt, less current maturities	8,000		6,000		2,572		—		—
Stockholders’ equity	12,873		14,527		18,093		44,371		47,843
Other Data:
Active Associates	61,000		56,000		66,000		88,000		114,000
Active Preferred Customers	43,000		41,000		45,000		51,000		63,000
Total Active Customers	104,000		97,000		111,000		139,000		177,000

* The Company’s fiscal year ends on the Saturday closest to December 31. The 2000, 2001, 2002, and 2004 fiscal years were 52-week years. Fiscal year 2003 was a 53-week year.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

We develop and manufacture high-quality nutritional and personal care products that are distributed through a network marketing system. Net sales are primarily dependent upon the efforts of a network of independent Associates who purchase products and sales materials. As of January 1, 2005, we had approximately 114,000 active Associates in the United States, Canada, Australia, New Zealand, Hong Kong, Japan, Taiwan, South Korea, Singapore, Mexico, the Netherlands, and the United Kingdom. We also sell products directly to Preferred Customers who purchase products for personal use and are not permitted to resell or distribute the products. As of January 1, 2005, we had approximately 63,000 active Preferred Customers worldwide. For purposes of this report, we only count as active customers those Associates and Preferred Customers who have purchased product from USANA at any time during the most recent three-month period.

As discussed more fully in Segment Information Note L of the audited consolidated financial statements included in this report, we have two reportable segments: Direct Selling and Contract Manufacturing. The Direct Selling segment constitutes our principal line of business: developing, manufacturing, and distributing nutritional and personal care products through a network marketing system. The Contract Manufacturing segment includes the manufacture of premium personal care products, produced under the brand name of its customers, including manufacturing and packaging for the Company’s Sensé product line of skin and personal care products.

We recognize revenue when products are shipped and title passes to our customers. In 2004, sales in the nine primary geographic regions within our Direct Selling segment contributed to consolidated net sales as follows:

·	United States	41.6	%
·	Canada	19.3	%
·	Australia-New Zealand	13.1	%
·	Hong Kong	4.0	%
·	Japan	3.4	%
·	Taiwan	5.9	%
·	South Korea	2.1	%
·	Singapore	3.8	%
·	Mexico	3.0	%

Sales from the Contract Manufacturing segment accounted for the remaining 3.8% of consolidated net sales in 2004.

As we expand our business into additional international markets, we expect international operations to account for an increasing percentage of net sales.

Cost of sales primarily consists of expenses related to raw materials, labor, quality assurance, and overhead costs that are directly associated with the production and distribution of products and sales materials, as well as duties and taxes associated with product exports. As international sales increase as a percentage of net sales, cost of sales could increase slightly, reflecting additional duties, freight, and other expenses associated with international growth.

Associate incentive expenses are incurred only by the Direct Selling segment and represent the most significant expense for this segment at 39.8% of net segment sales in 2004. Associate incentives include commissions and leadership bonuses that are paid weekly, based on sales volume points. Certain promotions and contests are also reported as Associate incentives. Products are assigned a sales volume point value that is independent of the product’s price. Associates earn commissions based on sales volume points generated in their downline sales organization. Starter kits and sales tools have no sales volume point value, and commissions are not paid on the sale of these items.

Selling, general, and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Associate events, promotion and advertising, and professional fees along with other marketing and administrative expenses. Wages and benefits represent the largest component of selling, general, and administrative expenses. Significant depreciation and amortization expense is incurred as a result of continued investments in computer and telecommunications equipment and systems to support international expansion is also included as a component of selling, general, and administrative expenses. We anticipate that significant additional capital investments will be required in future periods to promote and support anticipated growth in sales and the increasing size of our customer base.

Research and development expenses include costs incurred in developing new products, enhancing existing products, and formulating products for introduction into international markets.

Results of Operations

The following table summarizes operating results as a percentage of net sales, respectively, for the periods indicated:

	Fiscal Year
	2002		2003		2004
Consolidated Statements of Earnings Data:
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	25.0		22.2		24.5
Gross profit	75.0		77.8		75.5
Operating expenses:
Associate incentives	38.3		39.3		38.3
Selling, general, and administrative	26.4		22.2		20.0
Research and development	0.8		0.7		0.7
Total operating expenses	65.5		62.2		59.0
Earnings from operations	9.5		15.6		16.5
Other income (expense), net	(0.2	)	0.1		0.1
Earnings before income taxes	9.3		15.7		16.6
Income taxes	3.0		5.3		5.2
Net earnings	6.3	%	10.4	%	11.4	%

Fiscal Year 2004 compared to Fiscal Year 2003

Net Sales. Net sales increased 36.4%, or $72.8 million, to $272.8 million for 2004, from $200.0 million in 2003. This increase consisted of $64.3 million associated with our Direct Selling segment and $8.5 million associated with our Contract Manufacturing segment acquired in July 2003.

The following table summarizes the growth in net sales by segment and geographic region for the fiscal years ended January 3, 2004 and January 1, 2005.

Net Sales By Segment and Region
(in thousands)

	Year Ended								Change from			Percent
Segment / Region	2003				2004				Prior Year			Change
Direct Selling
United States	$	91,033	45.5	%	$	113,579	41.6	%		$	22,546	24.8	%
Canada	44,187		22.1	%	52,552		19.3	%		8,365		18.9	%
Australia-New Zealand	29,508		14.8	%	35,684		13.1	%		6,176		20.9	%
Hong Kong	8,850		4.4	%	11,117		4.0	%		2,267		25.6	%
Japan	6,537		3.3	%	9,218		3.4	%		2,681		41.0	%
Taiwan	13,619		6.8	%	16,009		5.9	%		2,390		17.5	%
South Korea	3,515		1.8	%	5,742		2.1	%		2,227		63.4	%
Singapore	920		0.5	%	10,316		3.8	%		9,396		1,021.3	%
Mexico	—		0.0	%	8,296		3.0	%		8,296		N/A
Segment Total	198,169		99.2	%	262,513		96.2	%		64,344		32.5	%
Contract Manufacturing	1,844		0.8	%	10,311		3.8	%		8,467		459.2	%
Consolidated	$	200,013	100.0	%	$	272,824	100.0	%		$	72,811	36.4	%

The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:

· A 18% increase in the active Associate base and a 22% increase in the active Preferred Customer base for the year ended 2004 in markets that were open the full year in both 2004 and 2003,

· A $2.2 million and $9.4 million increase in South Korea and Singapore, respectively, due to a full year of operations, and

· Stronger foreign currencies relative to the U.S. dollar, which positively affected the translation of sales in foreign markets by $9.1 million.

We commenced operations in Mexico in March 2004, which contributed $8.3 million to net sales for 2004.

Total sales reported in 2003 included an additional week worth of sales totaling approximately $4.0 million (fiscal year 2003 was a 53-week year and fiscal year 2004 was a 52-week year).

The increase in net sales contributed by the Contract Manufacturing segment can be primarily attributed to the following factors:

· A full year of operations for the segment that commenced in July 2003,

· A significant increase in sales to the segment’s primary customer, and

· New contracts added during 2004.

The Company follows the practice of providing guidance concerning anticipated net sales. Based on the current expectations of management, we anticipate annual net sales in the range of $319 to $327 million for fiscal year 2005.

The following tables summarize the growth (decline) in active customers, rounded to the nearest thousand, for the Direct Selling segment by geographic region as of the dates indicated:

Active Associates By Region

	As of			As of			Change from			Percent
Region	January 3, 2004			January 1, 2005			Prior Year			Change
United States	35,000	39.8	%	43,000	37.7	%		8,000		22.9	%
Canada	19,000	21.6	%	22,000	19.3	%		3,000		15.8	%
Australia-New Zealand	13,000	14.8	%	14,000	12.3	%		1,000		7.7	%
Hong Kong	4,000	4.5	%	5,000	4.4	%		1,000		25.0	%
Japan	3,000	3.4	%	4,000	3.5	%		1,000		33.3	%
Taiwan	8,000	9.1	%	9,000	7.9	%		1,000		12.5	%
South Korea	4,000	4.5	%	2,000	1.8	%		(2,000	)	(50.0	)%
Singapore	2,000	2.3	%	8,000	7.0	%		6,000		300.0	%
Mexico	—	0.0	%	7,000	6.1	%		7,000		N/A
Total	88,000	100.0	%	114,000	100.0	%		26,000		29.5	%

We believe that various factors contributed to the increase in the 2004 active Associate base, including new market openings, on-going communication with Associate leaders in the field, improved infrastructure to enhance the Associate service level, and company-sponsored events and promotions to motivate Associates.

Active Preferred Customers By Region

	As of			As of			Change from		Percent
Region	January 3, 2004			January 1, 2005			Prior Year		Change
United States	31,000	60.8	%	38,000	60.3	%		7,000	22.6	%
Canada	15,000	29.4	%	17,000	27.0	%		2,000	13.3	%
Australia-New Zealand	4,000	7.8	%	5,000	7.9	%		1,000	25.0	%
Hong Kong	1,000	2.0	%	1,000	1.6	%		—	0.0	%
Japan	**	0.0	%	1,000	1.6	%		1,000	N/A
Taiwan	**	0.0	%	**	0.0	%		—	N/A
South Korea	**	0.0	%	**	0.0	%		—	N/A
Singapore	**	0.0	%	**	0.0	%		—	N/A
Mexico	—	0.0	%	1,000	1.6	%		1,000	N/A
Total	51,000	100.0	%	63,000	100.0	%		12,000	23.5	%

** Active Preferred Customer count is less than 500.

Total Active Customers By Region

	As of			As of			Change from			Percent
Region	January 3, 2004			January 1, 2005			Prior Year			Change
United States	66,000	47.5	%	81,000	45.8	%		15,000		22.7	%
Canada	34,000	24.5	%	39,000	22.0	%		5,000		14.7	%
Australia-New Zealand	17,000	12.2	%	19,000	10.8	%		2,000		11.8	%
Hong Kong	5,000	3.6	%	6,000	3.4	%		1,000		20.0	%
Japan	3,000	2.1	%	5,000	2.8	%		2,000		66.7	%
Taiwan	8,000	5.8	%	9,000	5.1	%		1,000		12.5	%
South Korea	4,000	2.9	%	2,000	1.1	%		(2,000	)	(50.0	)%
Singapore	2,000	1.4	%	8,000	4.5	%		6,000		300.0	%
Mexico	—	0.0	%	8,000	4.5	%		8,000		N/A
Total	139,000	100.0	%	177,000	100.0	%		38,000		27.3	%

Gross Profit. Consolidated gross profit decreased to 75.5% of net sales in 2004 from 77.8% in 2003. The Direct Selling segment’s gross profit remained relatively constant at 78.0% of net segment sales in 2004, compared to 78.3% in 2003. Gross profit in our Contract Manufacturing segment decreased to 12.5% of net segment sales from 28.8% in 2003.

During 2004, we continued to encounter higher purchase prices for one of our raw materials, Coenzyme Q10 (CoQ10), due to a persistent shortage in supply. We have qualified multiple sources to supply this raw ingredient and are confident that we can obtain the quantities necessary to meet production requirements. However, we expect sustained modest pressure on the gross profit margin for our Direct Selling segment from higher purchase prices for CoQ10. Additionally, we increased our provision for inventory valuation to account for obsolescence of our old Sensé inventory. These factors that contributed to a lower gross profit margin were partially offset by improved production efficiencies achieved in 2004.

The relatively lower gross profit margin in our Contract Manufacturing segment during 2004 was primarily a result of two factors:

· Construction upgrades to our manufacturing facility in Draper, Utah that took place during the first quarter of 2004 and

· Higher than anticipated demand resulting in additional production and distribution costs, such as expediting freight.

We anticipate modest sequential improvement to the consolidated gross profit margin throughout 2005.

Associate Incentives. Expenses related to Associate incentives are incurred only by the Direct Selling segment and represent the most significant cost as a percent of net sales for the segment. Associate incentives remained relatively constant at 39.8% of net segment sales in 2004 compared to 39.7% in 2003.

We believe that Associate incentives, as a percentage of net sales for the Direct Selling segment during 2005 will be approximately 40% as we continue our commitment to providing our Associates with a highly competitive and rewarding Compensation Plan.

Selling, General, and Administrative. Selling, general, and administrative expenses decreased to 20.0% of net sales in 2004 from 22.2% in 2003. The decrease as a percentage of net sales can be primarily attributed to leverage gained on the increase in net sales during 2004.

While selling, general, and administrative expenses decreased as a percentage of net sales from 2003 to 2004, in absolute terms, these expenses increased $10.3 million or 23.1% in 2004, virtually all of which can be attributed to the Direct Selling segment. The absolute increase in selling, general, and administrative expenses contributed by the Direct Selling segment can be primarily attributed to the following factors:

· An increase in spending in many of our markets to support a growing Associate base and related sales,

· Increased spending in our newest markets of South Korea, Singapore, and Mexico, totaling approximately $3.9 million, due to a full year of operations, and

· Higher translated U.S. dollars of foreign currency expenses, totaling $1.1 million, as a result of a weaker U.S. dollar.

We believe that selling, general, and administrative expenses will decrease in 2005 as a percentage of net sales when compared to 2004. We believe this decrease will likely occur as a result of leverage benefits on a rising sales base. We do, however, expect that these expenses will rise in absolute terms as a result of increased variable costs related to higher sales, a growing Associate base, and additional costs associated with the opening of a new market by the end of the third quarter of 2005.

Income Taxes. As a result of a favorable revision to the calculation of the Research and Experimentation Credit and a favorable settlement of a foreign tax audit during 2004, we generated significant tax benefits in the current year, yielding an effective tax rate of 31.7%, compared to 33.5% in 2003.

We expect that the effective tax rate for 2005 will be approximately 34% due to the following:

· The favorable prior period adjustment for a revision to the calculation of the 2003 Research and Experimentation Credit in 2004, with no prior period adjustments expected for the 2005 calculation,

· The favorable settlement of a foreign tax audit during 2004, which will not occur in 2005, and

· The new American Jobs Creation Act, with the 20% phase out of the Extraterritorial Income Exclusion benefit in 2005 that will be partially offset by the introduction of the new 3% deduction of Qualified Production Activities Income.

Net Earnings. Net earnings increased to 11.4% of net sales in 2004 from 10.4% in 2003. The increase in net earnings can primarily be attributed to the following:

· Increased net sales,

· Improved operating margins, and

· A lower effective income tax rate.

Diluted earnings per share were $1.51 for 2004, an increase of $0.53 from diluted earnings of $0.98 per share in 2003. The favorable tax results mentioned above positively impacted diluted earnings per share for 2004 by $0.03.

Fiscal Year 2003 compared to Fiscal Year 2002

Net Sales. Net sales increased 49.5%, or $66.2 million, to $200.0 million for 2003, from $133.8 million in 2002. This increase consisted of $64.4 million associated with our Direct Selling segment and $1.8 million associated with our Contract Manufacturing segment acquired in July 2003.

The following table summarizes the growth in net sales by segment and geographic region for the fiscal years ended December 28, 2002 and January 3, 2004.

Net Sales By Segment and Region
(in thousands)

	Year Ended								Change from			Percent
Segment / Region	2002				2003				Prior Year			Change
Direct Selling
United States	$	70,062	52.4	%	$	91,033	45.5	%		$	20,971	29.9	%
Canada	31,712		23.7	%	44,187		22.1	%		12,475		39.3	%
Australia-New Zealand	17,606		13.2	%	29,508		14.8	%		11,902		67.6	%
Hong Kong	7,098		5.3	%	8,850		4.4	%		1,752		24.7	%
Japan	4,955		3.7	%	6,537		3.3	%		1,582		31.9	%
Taiwan	2,343		1.7	%	13,619		6.8	%		11,276		481.3	%
South Korea	—		0.0	%	3,515		1.8	%		3,515		N/A
Singapore	—		0.0	%	920		0.5	%		920		N/A
Segment Total	133,776		100.0	%	198,169		99.2	%		64,393		48.1	%
Contract Manufacturing	—		0.0	%	1,844		0.8	%		1,844		N/A
Consolidated	$	133,776	100.0	%	$	200,013	100.0	%		$	66,237	49.5	%

The increase in net sales contributed by the Direct Selling segment can be primarily attributed to the following factors:

· A 24% increase in the active Associate base and a 13% increase in the active Preferred Customer base for the year ended 2003 in markets that have been open longer than one year,

· An $11.3 million increase in net sales in Taiwan due to a full year of operations,

· Stronger foreign currencies relative to the U.S. dollar, which positively affected the translation of sales in foreign markets by approximately $10.8 million, and

· An additional week of reported sales in 2003 that added approximately $4.0 million (fiscal year 2002 was a 52-week year and fiscal year 2003 was a 53-week year).

We commenced operations in South Korea and Singapore in July and November 2003, respectively. These new markets provided an increase of approximately 9% to the active Associate base and contributed $3.5 million and $0.9 million in net sales, respectively for the fiscal year ended January 3, 2004.

Additionally, our Contract Manufacturing segment, acquired in July of 2003, contributed $1.8 million to the increase in consolidated net sales.

The following tables summarize the growth in active customers, rounded to the nearest thousand, for the Direct Selling segment by geographic region as of the dates indicated:

Active Associates By Region

	As of			As of			Change from		Percent
Region	December 28, 2002			January 3, 2004			Prior Year		Change
United States	28,000	42.4	%	35,000	39.8	%		7,000		25.0	%
Canada	16,000	24.2	%	19,000	21.6	%		3,000		18.8	%
Australia-New Zealand	11,000	16.7	%	13,000	14.8	%		2,000		18.2	%
Hong Kong	4,000	6.1	%	4,000	4.5	%		—		0.0	%
Japan	2,000	3.0	%	3,000	3.4	%		1,000		50.0	%
Taiwan	5,000	7.6	%	8,000	9.1	%		3,000		60.0	%
South Korea	—	0.0	%	4,000	4.5	%		4,000		N/A
Singapore	—	0.0	%	2,000	2.3	%		2,000		N/A
Total	66,000	100.0	%	88,000	100.0	%		22,000		33.3	%

We believe that various factors contributed to the increase in the 2003 active Associate base, including general enthusiasm created by international expansion, on-going communication with Associate leaders in the field, improved infrastructure to enhance the Associate service level, and company-sponsored events and promotions to motivate Associates.

Active Preferred Customers By Region

	As of			As of			Change from		Percent
Region	December 28, 2002			January 3, 2004			Prior Year		Change
United States	27,000	60.0	%	31,000	60.8	%		4,000		14.8	%
Canada	13,000	28.9	%	15,000	29.4	%		2,000		15.4	%
Australia-New Zealand	4,000	8.9	%	4,000	7.8	%		—		0.0	%
Hong Kong	1,000	2.2	%	1,000	2.0	%		—		0.0	%
Japan	**	0.0	%	**	0.0	%		—		N/A
Taiwan	**	0.0	%	**	0.0	%		—		N/A
South Korea	—	0.0	%	**	0.0	%		—		N/A
Singapore	—	0.0	%	**	0.0	%		—		N/A
Total	45,000	100.0	%	51,000	100.0	%		6,000		13.3	%

** Active Preferred Customer count is less than 500.

Total Active Customers By Region

	As of			As of			Change from		Percent
Region	December 28, 2002			January 3, 2004			Prior Year		Change
United States	55,000	49.5	%	66,000	47.5	%		11,000		20.0	%
Canada	29,000	26.1	%	34,000	24.5	%		5,000		17.2	%
Australia-New Zealand	15,000	13.6	%	17,000	12.2	%		2,000		13.3	%
Hong Kong	5,000	4.5	%	5,000	3.6	%		—		0.0	%
Japan	2,000	1.8	%	3,000	2.1	%		1,000		50.0	%
Taiwan	5,000	4.5	%	8,000	5.8	%		3,000		60.0	%
South Korea	—	0.0	%	4,000	2.9	%		4,000		N/A
Singapore	—	0.0	%	2,000	1.4	%		2,000		N/A
Total	111,000	100.0	%	139,000	100.0	%		28,000		25.2	%

Gross Profit. Consolidated gross profit improved to 77.8% of net sales in 2003 from 75.0% in 2002. Direct Selling’s gross profit improved to 78.3% of net sales for the segment in 2003 from 75.0% in 2002. Gross profit for the Contract Manufacturing segment was 28.8% of net segment sales for 2003.

The increase in gross profit for the Direct Selling segment can be attributed primarily to:

· Cost improvement in procurement and production activities,

· A change in pricing that created greater incentives for our Associates and that generally contributed to a higher gross profit margin, and

· Leverage benefits of variable costs on a rising sales base.

Associate Incentives. Expenses related to Associate incentives are incurred only by the Direct Selling segment and represent the most significant cost as a percentage of net sales for this segment. Associate incentives increased to 39.7% of net segment sales in 2003 from 38.3% in 2002. This increase can be attributed to:

· A change in pricing that created greater incentives for our Associates,

· An increase in the commission payout rate in the Australia-New Zealand market, with no corresponding increase in the price at which we sell our products,

· The elimination of payment processing fees charged to customers in our North America and Australia-New Zealand markets, and

· Additional spending for special Associate promotions and contests during 2003.

Selling, General, and Administrative. Selling, general, and administrative expenses decreased to 22.2% of net sales in 2003 from 26.4% in 2002. The decrease as a percentage of net sales can be primarily attributed to the increase in net sales during 2003.

While selling, general, and administrative expenses decreased as a percentage of net sales from 2002 to 2003, in absolute terms, these expenses increased $9.0 million or 25.5% in 2003, the majority of which can be attributed to the Direct Selling segment. The acquisition of the Contract Manufacturing segment added $435,000 to the absolute dollar increase in selling, general, and administrative expenses. The increase in selling, general, and administrative expenses contributed by the Direct Selling segment can be primarily attributed to the following factors:

· Increased spending in our more mature markets to support growing sales and an increasing customer base,

· Increased spending in our new markets of Taiwan, South Korea, and Singapore of approximately $1.1 million, $1.9 million, and $0.3 million, respectively,

· Increased spending on certain expenses, including employee and management performance incentives, Associate related expenses, and insurance costs, and

· Higher translated U.S. dollars of foreign currency expenses, totaling $1.2 million, as a result of a weaker U.S. dollar.

Selling, general, and administrative expense in 2002 included one-time costs totaling $0.4 million associated with a proposed sale of assets transaction, which was abandoned by the Company.

Other Income (Expense). Other income (expense) changed from other expense of $221,000 in 2002 to other income of $192,000 in 2003. This increase in net other income of $413,000 can be primarily attributed to lower interest expense and higher interest income. These improvements are due to the retirement of debt during the first quarter of 2003.

Income Taxes. As a result of increased revenue and profitability in our foreign markets during 2003, we generated significant tax benefits in the current year, yielding an effective tax rate of 33.5%.

Net Earnings. Net earnings increased to 10.4% of net sales in 2003 from 6.3% in 2002. The increase in net earnings can primarily be attributed to the following:

· Increased net sales,

· Significant improvements in our gross profit margin, and

· Improved leverage on a rising sales base.

Diluted earnings per share were $0.98 for 2003, an increase of $0.57 from diluted earnings of $0.41 per share in 2002. Diluted earnings per share calculations have been adjusted to reflect the two-for-one split of the Company’s stock effected in October 2003.

Quarterly Financial Information

The following tables set forth unaudited quarterly operating results for each of the last eight fiscal quarters, as well as percentages of net sales for certain data for the periods indicated. This information has been prepared on a basis consistent with the consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the data. Quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with the audited consolidated financial statements and notes thereto that are included elsewhere in this report.

	Quarter Ended
	March 29,			June 28,				Sept. 27,			Jan. 3,			April 3,		July 3,			Oct. 2,			Jan. 1,
	2003			2003				2003			2004			2004		2004			2004			2005
	(in thousands, except per share data)
Consolidated Statements of Earnings Data:
Net sales		$	40,864		$	47,157			$	52,506	$	59,486		$	61,775	$	67,246		$	68,673		$	75,130
Cost of sales		9,220			10,417				11,364		13,421			15,058		16,195			16,732			18,837
Gross profit		31,644			36,740				41,142		46,065			46,717		51,051			51,941			56,293
Operating expenses:
Associate incentives		16,097			18,662				20,332		23,584			23,612		25,556			26,210			29,055
Selling, general, and administrative		9,572			10,574				11,926		12,341			13,262		13,656			13,141			14,633
Research and development		334			373				379		298			578		607			450			396
Total operating expenses		26,003			29,609				32,637		36,223			37,452		39,819			39,801			44,084
Earnings from operations		5,641			7,131				8,505		9,842			9,265		11,232			12,140			12,209
Other income (expense), net		34			(228		)		525		(139		)	149		(1		)	(513		)	598
Earnings before income taxes		5,675			6,903				9,030		9,703			9,414		11,231			11,627			12,807
Income taxes		2,100			2,554				2,974		2,866			3,201		3,818			3,631			3,652
Net earnings		$	3,575		$	4,349			$	6,056	$	6,837		$	6,213	$	7,413		$	7,996		$	9,155
Earnings per share:
Basic		$	0.19		$	0.23			$	0.32	$	0.35		$	0.32	$	0.39		$	0.42		$	0.48
Diluted		$	0.17		$	0.20			$	0.28	$	0.32		$	0.30	$	0.36		$	0.39		$	0.46
Weighted average shares outstanding:
Basic		18,624			19,088				19,058		19,285			19,377		19,199			19,052			19,025
Diluted		21,048			21,450				21,384		21,389			20,853		20,523			20,296			19,990

	Quarter Ended
	March 29,			June 28,			Sept. 27,			Jan. 3,		April 3,		July 3,		Oct. 2,		Jan. 1,
	2003			2003			2003			2004		2004		2004		2004		2005
Consolidated Statements of Earnings as a percentage of Net Sales:
Net Sales		100.0	%		100.0	%		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Sales		22.6			22.1			21.6		22.6		24.4		24.1		24.4		25.1
Gross profit		77.4			77.9			78.4		77.4		75.6		75.9		75.6		74.9
Operating Expenses:
Associate Incentives		39.4			39.6			38.7		39.6		38.2		38.0		38.2		38.7
Selling, general and administrative		23.4			22.4			22.7		20.7		21.5		20.3		19.1		19.5
Research and development		0.8			0.8			0.7		0.5		0.9

Utah	87-0500306
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3838 West Parkway Blvd., Salt Lake City, Utah 84120
(Address of principal executive offices, Zip Code)
(801) 954-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share

		Page
Part I
Item 1	Business	3
Item 2	Properties	19
Item 3	Legal Proceedings	20
Item 4	Submission of Matters to a Vote of Security Holders	20
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6	Selected Financial Data	23
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8	Financial Statements and Supplementary Data	48
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48
Item 9A	Controls and Procedures	48
Item 9B	Other Information	52
Part III
Item 10	Directors and Executive Officers of the Registrant	52
Item 11	Executive Compensation	52
Item 12	Security Ownership of Certain Beneficial Owners and Management	52
Item 13	Certain Relationships and Related Transactions	52
Item 14	Principal Accounting Fees and Services	52
Part IV
Item 15	Exhibits, Financial Statement Schedules	52
Signatures		54